GAO Water and Wastewater Infrastructure Financing Report

By Alfredo Gomez

Frequent and highly publicized incidents of combined sewer overflows into rivers and streams, as well as water main breaks in the largest cities in the U.S., are perhaps the most visible manifestations of the nation’s water infrastructure problem. To begin to address this problem, in spring 2013, the House Appropriations Subcommittee on Interior, Environment, and Related Agencies held hearings on financing options for the nation’s water infrastructure.

In testimony for that hearing, the U.S. Government Accountability Office (GAO), an independent, nonpartisan agency that works for Congress, stated that the nation’s water utilities face the task and costs of upgrading aging and deteriorating infrastructure in both drinking water plants and wastewater treatment systems (See GAO-13-451T). The Environmental Protection Agency (EPA) estimates the costs for upgrading this infrastructure to be in the hundreds of billions of dollars over the next 20 years. Much of the costs will be borne by local communities and utilities and their ratepayers, according to GAO’s testimony. Although, the federal government and states have played a long-time role in assisting local communities and utilities and will likely continue to do so.

GAO’s testimony provided information on options available for financing water and wastewater infrastructure, including EPA’s Clean and Drinking Water State Revolving (SRF) programs, a clean water trust fund, a national infrastructure bank, and public-private partnerships.

EPA’s Clean Water and Drinking Water SRF programs are the largest sources of federal assistance to states and local communities for funding drinking water and wastewater infrastructure. Together, the programs receive more than $2 billion in annual funding and were provided with an additional $6 billion under the American Recovery and Reinvestment Act of 2009. The Clean Water and Drinking Water SRF programs provide funds to states, which in turn create SRFs. States typically use the SRFs to provide low- or no-interest loans for infrastructure upgrades to communities or utilities; repayment of the loans replenishes the funds and provides for loans to future projects.

The Clean Water SRF can be used for projects such as constructing or upgrading secondary or advanced wastewater treatment facilities or constructing new sewers or storm sewers. The Drinking Water SRF can be used to upgrade or replace infrastructure to address violations of drinking water regulations or to replace aging storage facilities, distribution pipelines, treatment facilities, and similar projects related to public health protection.

Three additional financing options have been proposed to help fund future infrastructure needs. These options include: (1) a clean water trust find, (2) a national wastewater infrastructure bank, and (3) public-private partnerships. In its testimony, GAO summarized information on how these approaches apply to wastewater infrastructure, as follows:

• A clean water trust fund would provide a dedicated source of federal funding for wastewater infrastructure similar to federal trust funds, such as the Highway and Airport and Airways Trust Funds. The funds are used to account for funds that are dedicated for spending on a specific purpose. Stakeholders—including industry representatives and associations and federal, state, and local government officials—identified three issues that would need to be addressed in setting up a clean water trust fund. The issues included: how a fund should be administered and used, what type of financial assistance should be provided, and what activities should be eligible to receive funding. A majority of stakeholders said a fund should be administered by EPA and states, but they differed in their views on how a trust fund should be used.

• A national infrastructure bank would finance wastewater infrastructure through a variety of mechanisms, such as directly loaning money to eligible projects, guaranteeing municipal bonds to lower costs, and pooling loans from numerous, smaller municipalities to lower costs. Similar to the trust fund, stakeholders identified three issues that should be considered in designing a bank: mission and administrative structure, financing authorities, and project eligibility and prioritization.

• Public-private partnerships at the municipal level could encourage private investment in projects. GAO identified seven municipalities that entered into privately financed public-private partnerships, which involve a contractual agreement in which the private partner invests funds in the project but the municipality retains ownership of the infrastructure. Municipal and company officials identified advantages to these partnerships, such as having access to sources of financing other than traditional sources. They also identified challenges to using partnerships, such as local opposition and complex contracting arrangements.

In addition to its 2013 testimony, GAO recently issued a report highlighting challenges faced by wastewater treatment plants related to climate change (see GAO-14-23). According to wastewater professional associations, EPA, and the U.S. Global Climate Research Program, wastewater treatment plants face damage from more frequent flooding because they are often in low-lying areas near bodies of water and are designed for historic hydrologic conditions. In that report, GAO found that decision makers have not systematically incorporated climate change impacts into infrastructure planning. But, some municipalities have included climate change impacts in their planning and have adjusted their wastewater projects accordingly.

The implementation of climate change adaptation strategies will likely rely on collaborative sharing of costs and resources with federal, state, local, and nongovernmental stakeholders. In the report, GAO recommended that federal agencies clarify sources of climate change information for local decision makers, and that the EPA should work with professional associations to incorporate climate change into design standards.

Alfredo Gomez is director of Natural Resources and Environment for the U.S. Government Accountability Office (GAO).

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